The government may well have the right intent for reforms; but nothing is possible without adequate capacity. The lack of depth in economic and other technical expertise is visible from a few ECC decisions, especially in allocating energy resources to attain maximum efficiencies within given constraints.
The squeezed fiscal space has its adverse impact on various economic issues. Back in 2008, in the quest to slash the budget deficit, the IMF asked to end farm (and food) related subsidies. Back then, staple food items were cheaper than world prices, while today Pakistan’s food prices are much higher relative to the global averages.
In 2018, the Fund is likely to ask for removing whatever subsidies remain at federal level. The energy related subsidies ought to be phased out, and the government is already in action. The problem is that the energy prices in Pakistan are already higher than its peers and the country needs to provide energy to industries at competitive rates to gain exportable surplus, which in turn needs subsidy mechanism.
The biggest real time economic problem in Pakistan does not need economists to deal with - it's the inefficiencies in the energy chain. The circular debt keeps building up and nothing meaningful has been done to stop the leakage in the last decade. The energy capacity keeps on adding up to surpass both demand, and T&D system to carry, and no prioritisation in energy use is visible that could dilute the impact of increasing capacity charges. Similar is the case of gas where even after hike in prices, the losses are still not fully covered.
Seeing from the Fund’s lens, upward revision in energy prices is the optimal way to deal. The government has already revised up energy prices and it may negotiate not to fully pass on the impact this year. The Fund may still ask for a further increase energy prices next year to - without plugging the holes within the energy chain, there is no level of price hike that could end subsidies.
The problem is that the incumbent government has not prioritised its efforts right. The prime focus should have been on bringing efficiencies in the energy sector in early days, which is simply lacking. There are too many stakeholders dealing with the energy sector with no one taking the onus.
There is one energy ministry, working in two divisions having two ministers and two full-fledged secretariats without much coordination amongst the two wings. Then there is an advisor on circular debt, while another senator independently prepared a report on circular debt. Apart from these, there is a task force on energy, which is headed by a private sector player in the chain. On top, the ECC chairman spearheads all decisions, while being finance minster he already has too much on his plate.
There is a complete mess in dealing with energy sector, which is visible from a few ECC decisions - for instance, the ECC decided to provide gas to Punjab exporting industries when there is surplus capacity available in the system. For details read "Textile, gas and comedy of errors" published on 8th November, 2018
Why was the private sector allowed to import FO in October? There was a crisis last year, and because of import of FO, local refineries were almost closed; an even a bigger crisis is in the offing this year. For details read "No end to furnace oil love affair" published on 9th November 2018
The ECC is not picking up the right battles. The priority is simply not right. ECC in its early meetings was busy in fixing fertiliser prices or thinking on renegotiating RLNG terminal agreements while the right use of surplus energy capacity does not appear to be on the table yet. The urgent need is to have one energy minister or an advisor to deal with the energy issues. The finance minister is already dealing with the power holding company, and dealing with circular debt issues at the same time might create a conflict – which is not advised.
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